Monday, July 26, 2010

Quotes of the day

Even though I come from a family of firefighters (and one police officer), the most heroic person I’ve ever known was neither a firefighter nor a cop nor a jock: She was my mother, a homemaker who raised five kids and endured without complaint the ravages of cancer in the 1970s, with its then crude chemotherapy regimen, its painful cobalt treatments, the collateral damage of loss of hair, vitality, and lucidity. In refusing to rail against her fate or to take her pain out on others, she set an example of selfless courage and heroism I'll never forget.--William Astore

... in 1919, Einstein’s General Theory of Relativity was only a few years old, yet academics were eager to put the nightmare of World War I behind them, and show the common bond of the old adversaries. Proving the German’s theory correct was so desired that it suggests that scientists are as objective as the rest of us. The null hypothesis, set up by standard Newtonian Physics, was that there should be a 0.85 arc-second deflection in light from stars behind the sun, while Einstein predicted a 1.7 arc-second deflection. English physicist Arthur Eddington was a WorldWar I pacifist, and so had a predisposition to mend the rift between German and English academics. He made a trek to the island of Principe, off the coast of West Africa, one of the best locations for observing the eclipse. He used a series of complex calculations to extract the deflection estimate from the data, and came up with an estimate of 1.6 arc-seconds. Data from two spots in Brazil from that same eclipse were 1.98 and 0.86, but Eddington threw out the 0.86 measurements. ... Eddington died after a life of honors, his eclipse experiment his most conspicuous achievement, yet it was tendentious empirical work. Science is filled with fraud behind correct results: Mendel fudged his numbers, Pasteur was hardly fair to his critics. A great deal of science is motivated by confabulation, generating evidence for beliefs already acquired. In that sense scientists are little different than most professions, where one has ideals vs. reality. Lawyers aren't primarily interested in justice, teachers [aren't] primarily interested in children, even 'the best'. After all, unlike judges, most scientists have a rooting interest for whatever theory they are proposing, they want to be the founding father of some branch of knowledge. Those of us merely judging, meanwhile, are choosing between two choices, and as we don't have any skin in the game, we want the truth because that's what's helpful.--Eric Falkenstein

[Alvin] Roth, aided by a Harvard graduate student and a young economist at Columbia, redesigned the [New York City middle school placement] system using a version of what's known as a deferred-acceptance algorithm. Roth has used modified forms of this same algorithm to design matching systems for Boston's public school system and for placing medical school graduates with residency programs. The algorithm is most easily explained in the context of matching multiple men and women who want to marry. First, each man proposes to his first-choice woman. Women who get numerous proposals reject their least preferred suitors, but don't make a firm commitment just yet. The rejected guys make new offers, in order of their preferences, perhaps resulting in new rejections, until none of the guys is rejected or no rejected guy wants to propose to anyone else. At that point the women accept their most preferred suitor. For the men who don't get matches in the first round because they didn't list enough choices, there is another round where the men are offered a list of still-single women and they make another set of choices. Sometimes a third round is needed. Applied to the high school scenario, the men are the equivalent of students and the women are the schools. In New York it gets more complicated, because many schools have their own screening mechanisms. Roth and his team were able to weave all that complexity into one transparent, reliable system where students list up to 12 choices in order of preference. Since Roth revamped things the participation rate jumped from 66% to 93%.--Susan Adams

Like public urination, turnstile-jumping and the squeegee racket were illegal but difficult to control, and seemingly trivial compared with more serious crimes. In both cases, the New York Police Department dramatically reduced violations by publicly announcing its intent to punish offenders and then following through with intensive arrests. In a relatively short period, the combination of public communication and concentrated enforcement created a new, low-violation equilibrium without much need for serious follow-up enforcement. The credible threat of arrest made the squeegee scheme unprofitable—it soon vanished altogether—and reestablished the norm of paying the fare among subway riders. If the conventional economic theory of crime were correct, the behavior would return to its old pattern as soon as formal enforcement relaxed, but this has not occurred. Temporary, high-profile interventions have had a permanent effect.--Paul Romer

People have concerns besides simply prolonging their lives. Surveys of patients with terminal illness find that their top priorities include, in addition to avoiding suffering, being with family, having the touch of others, being mentally aware, and not becoming a burden to others. Our system of technological medical care has utterly failed to meet these needs, and the cost of this failure is measured in far more than dollars. The hard question we face, then, is not how we can afford this system’s expense. It is how we can build a health-care system that will actually help dying patients achieve what’s most important to them at the end of their lives.--Atul Gawande

Major wars aside, if the United States approached or exceeded the 90 percent [debt-to-GDP-ratio] figure, it would be a sign of a dysfunctional politics and an irresponsible citizenry. Do we have to borrow that much money? Can't we just pay for the stuff? Apparently not. ... At some sufficiently high debt-gdp ratio, it becomes a foreign policy issue and a big one. Postwar UK had a high debt to gdp ratio, and to this day it is a fine place, but that debt meant the end of England as a world power, for better or worse. The U.S. for instance used financial issues to push England around and they basically had to give up on their overseas commitments. A very high debt ratio here would mean the end of the U.S. as a global world power, again even if gdp does OK. A global power needs the option of spending a lot more, quickly, without asking for anyone's permission. Your mileage on a U.S. retreat from the global policeman role will vary, but it's the elephant in the room which hardly anyone is talking about.--Tyler Cowen

The bottom line is that we can help the economy more by laying out a credible plan to end the debt explosion.--John Taylor

Part of the challenge of creating sustainable patterns of specialization and trade can be described as a matching problem. Think of two decks of cards, one with a list of workers with specialized skills and one with a list of occupations that utilize specialize skills. If you draw two cards at random, the chances are that they will not match. The skills of the worker will not match the skills required in the occupation. In that case, the marginal product of the worker in that occupation is very low, and the worker is unemployed. The economy's calculation problem is to sort the two decks in ways that match workers to occupations in which they have value. This problem becomes more complicated with each increment of technological progress. The number of occupations has increased, because even as some occupations become obsolete, even more occupations emerge as useful. Also, the amount of human capital needed for many occupations has increased. ... A danger in the economy is that an unsustainable pattern will go unrecognized for a long time. In the recessions of the U.S. between the end of World War II and the 1980's, excess inventories were accumulated. In the most recent episode, excesses in housing construction and mortgage finance went unrecognized for a long time. ... if the old patterns of specialization and trade are not sustainable, the economy faces the Recalculation Problem. New patterns of specialization and trade need to be created. While the economy is creating new patterns even in good times, when it faces a Recalculation Problem it cannot create new patterns rapidly enough to prevent widespread unemployment.--Arnold Kling

Housing is not a free market. The money being loaned out was essentially government funds (due to FDIC insurance), and thus the government needed to regulate the use of those funds to insure that banks were not taking excessive risks. When I bought my house in 1991 you needed to put 20% down or else buy mortgage insurance. I believe that requirement was phased out during the 1990s. That was the cause of the sub-prime bubble, not easy money. Money wasn’t easy. The job of monetary policymakers is to keep NGDP growing at a low and steady rate. The job of regulators is to correct for market failures, which includes other government policies that distort economic decision-making. The regulators failed in the early 2000s, not the Fed. (Of course the Fed is one of the regulators, so they are partly to blame. When I refer to ‘the Fed’ I mean the monetary policy unit within the Fed.)--Scott Sumner

One typical way insurance tries to reach a compromise between these conflicting goals [of protecting displaced workers while retaining their incentives to find work] is to have a deductible that is paid by insured persons, such as the $500 deductible many car owners have on their automobile insurance. The trouble with practically all the state-run unemployment insurance plans is that they typically have no or a minimal deductible because they provide coverage essentially from the first week of unemployment. In addition, they usually limit coverage to a fixed number of weeks, such as 26 weeks. This is an inefficient and costly approach since practically all the unemployed can readily cover their first several weeks of unemployment from savings, spouses’ earnings, or borrowing on credit cards and in other ways. Unemployed workers usually run into financial trouble only when they have been unemployed for an extended time. An optimal unemployment insurance plan would make unemployed workers responsible for their first month or two of unemployment, and mainly spend unemployment insurance resources on the longer-term unemployed. A second insurance approach to the moral hazard problem is to require significant co-payments, so that the insured have to pay a portion of any additional losses they experience after they exhaust the deductible. American unemployment insurance plans usually do pretty well on this by only paying about half or so of the earnings the unemployed had received when they were employed. Many European plans had usually replaced most or all of the earnings of the unemployed, and covered unemployed for many years. After they learned the hard way the prediction of economic theory that this encouraged significant increases in unemployment, several countries greatly cut back both the duration and payment (i.e., replacement) rates for the unemployed. Interestingly, In Germany this was done under a center-left Social Democratic government.--Gary Becker

Is the Federal Reserve (Fed) making a similar mistake to the one it made in 1936-1937? If you recall, the Fed during this time doubled the required reserve ratio under the mistaken belief that it would reign in what appeared to be an inordinate buildup of excess reserves. The Fed was concerned these funds could lead to excessive credit growth in the future and decided to act preemptively. What the Fed failed to consider was that the unusually large buildup of excess reserves was the result of banks insuring themselves against a replay of the 1930-1933 banking panics. So when the Fed increased the reserve requirements, the banks responded by cutting down on loans to maintain their precautionary level of excess reserves. As a result, the money multiplier dropped and the money supply growth stalled ...--David Beckworth

Unlike a Facebook profile or a blog entry, you cannot craft your gaming self at leisure. At play, within a virtual world, you are constantly reacting to the people and challenges around you. You’re free from most of the conventional constraints of “live” situations, but under all kinds of other pressure – something that can mean either streams of insults, or spontaneous acts of kindness. Either way, it’s startlingly fertile ground for finding like-minded others. --Tom Chatfield